What Living Expenses Are Tax Deductible?

Many individuals seek to understand how their everyday living expenses might reduce their taxable income. Tax deductions can effectively lower the amount of income subject to federal taxes, potentially leading to a lower tax bill or a larger refund. While not every expense qualifies, the Internal Revenue Service (IRS) allows deductions for specific types of expenditures that Congress has deemed eligible for tax relief. Understanding the general principles helps identify opportunities to reduce one’s tax burden.

Understanding Tax Deductibility

An expense is “tax deductible” when it can be subtracted from a taxpayer’s gross income, reducing their adjusted gross income (AGI) and taxable income. Generally, an expense must be “ordinary and necessary” for a trade or business, and not a personal, living, or family expense, unless specifically allowed by tax law. Most personal consumption costs are not deductible.

Tax deductions generally fall into two main categories: “above-the-line” deductions and “itemized deductions.” Above-the-line deductions are subtracted directly from gross income to arrive at a taxpayer’s AGI. These deductions are particularly beneficial because they reduce AGI, which can impact eligibility for other tax credits or deductions that have AGI-based limitations.

Itemized deductions, on the other hand, are subtracted from AGI, but only if their total exceeds the standard deduction amount for a given tax year. Taxpayers choose to itemize only if their cumulative itemized deductions provide a greater tax benefit than the standard deduction. Maintaining accurate and thorough records, such as receipts, invoices, and payment confirmations, is essential to substantiate any claimed deductions to the IRS.

Home-Related Deductions

Homeownership brings several potential tax benefits, particularly concerning mortgage interest and property taxes. These deductions can significantly reduce the taxable income for many homeowners.

Interest paid on a mortgage for a primary residence and a second home can be deductible, subject to certain limits, as outlined in IRS Publication 936. For mortgages incurred after December 15, 2017, the deduction is limited to interest paid on up to $750,000 of qualified home acquisition debt, or $375,000 if married filing separately. However, for mortgages taken out on or before December 15, 2017, the limit is higher, allowing interest on up to $1 million of acquisition debt ($500,000 if married filing separately) to be deductible. Interest on home equity loans is generally only deductible if the loan proceeds are used to buy, build, or substantially improve the taxpayer’s home. This deduction is claimed as an itemized deduction.

Real estate property taxes paid on a primary residence are also deductible. This deduction is subject to the overall State and Local Tax (SALT) limitation. Property taxes are claimed as an itemized deduction.

Medical Expense Deductions

Medical and dental expenses can provide a tax deduction for taxpayers who incur substantial healthcare costs. The IRS details qualifying medical expenses in Publication 502, which generally include costs for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. Examples of deductible expenses include fees for doctors, dentists, and other medical practitioners, hospital care, prescription medicines, and certain medical equipment like eyeglasses or crutches. Payments for qualified long-term care services and limited amounts for qualified long-term care insurance contracts are also included.

Only the amount of medical expenses exceeding a specific percentage of the taxpayer’s Adjusted Gross Income (AGI) is deductible. For the 2024 tax year, taxpayers can deduct the portion of unreimbursed medical expenses that is more than 7.5% of their AGI. For instance, if a taxpayer’s AGI is $50,000, only medical expenses above $3,750 ($50,000 x 7.5%) would be deductible. This threshold means that many taxpayers may not meet the requirement unless they have very high medical costs.

Medical expense deductions are itemized deductions. It is important to note that expenses merely beneficial to general health, such as vitamins not prescribed by a doctor, or cosmetic surgery not medically necessary, are generally not deductible.

Education and Retirement Savings Deductions

Several tax deductions are available to support educational pursuits and encourage retirement and health savings. These deductions can help individuals manage the costs of higher education and plan for their financial future.

Interest paid on qualified student loans can be an “above-the-line” deduction, meaning it reduces a taxpayer’s gross income directly, even if they do not itemize. For the 2024 tax year, taxpayers can deduct the lesser of $2,500 or the amount of interest actually paid during the year. A qualified student loan is one taken out solely to pay for qualified higher education expenses for the taxpayer, their spouse, or a dependent. However, this deduction is subject to income limitations, with the deductible amount gradually reduced and eventually eliminated for higher modified adjusted gross incomes (MAGI). For example, in 2024, single filers with MAGI of $95,000 or more generally cannot claim the deduction, while joint filers face a similar phase-out starting at $165,000 MAGI.

Contributions to a Traditional Individual Retirement Account (IRA) may also be tax-deductible. The deductibility depends on whether the taxpayer, or their spouse if filing jointly, is covered by a retirement plan at work and their income level. If neither is covered by a workplace retirement plan, the entire contribution may be deductible.

If covered, the deduction phases out at certain MAGI thresholds. For 2024, the maximum contribution limit for Traditional IRAs is $7,000, or $8,000 for individuals age 50 or older. This deduction is considered an “above-the-line” deduction, reducing AGI.

Contributions to a Health Savings Account (HSA) are fully tax-deductible as an “above-the-line” deduction, provided the taxpayer is covered by a high-deductible health plan (HDHP). For 2024, the maximum contribution is $4,150 for self-only HDHP coverage and $8,300 for family HDHP coverage. An additional “catch-up” contribution of $1,000 is allowed for individuals age 55 or older. HSAs offer a unique triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and qualified medical withdrawals are tax-free.

Other Common Living Expense Deductions

Beyond home, medical, and education-related expenses, several other common living expenses can lead to tax deductions. These often relate to state and local taxation, charitable giving, and in specific circumstances, alimony payments.

State and local taxes (SALT) paid by individuals are deductible, but are subject to a $10,000 limitation ($5,000 if married filing separately) for tax years through 2025. This includes state and local income taxes or, alternatively, state and local general sales taxes. Taxpayers can choose to deduct either income taxes or sales taxes, whichever provides a greater benefit. This deduction encompasses property taxes as well, which were discussed previously, and is claimed as an itemized deduction.

Cash and non-cash contributions made to qualified charitable organizations can also be tax-deductible. The amount that can be deducted is generally limited to a percentage of the taxpayer’s Adjusted Gross Income (AGI), typically up to 60% for cash contributions to public charities. Non-cash contributions may have lower limits, ranging from 20% to 50% of AGI, depending on the type of property and organization.

Any excess contributions beyond these limits can often be carried forward and deducted in future years, usually for up to five years. Proper substantiation, such as bank records for cash contributions or written acknowledgments for non-cash donations, is required, especially for contributions exceeding certain amounts. This deduction is an itemized deduction.

Alimony payments can be deductible for divorce or separation agreements executed on or before December 31, 2018. For these older agreements, the payer can deduct the alimony payments, and the recipient must include them as taxable income. However, for divorce or separation agreements executed after December 31, 2018, alimony payments are generally not deductible by the payer, and they are not considered taxable income for the recipient. If an agreement executed before 2019 is modified after that date, the new rules generally apply if the modification explicitly states that the updated rules are applicable. This deduction, for qualifying agreements, is an “above-the-line” deduction.